Shares of Lululemon (LULU) began to trade lower on Thursday after reporting third-quarter results that topped Wall Street estimates on both the top and bottom lines, but the fourth quarter revenue guidance was short of expectations. The athletic wear retailer recently was downgraded by Raymond James analysts but was this a mistake? Brian Nagel, Oppenheimer Senior Analyst, joins Yahoo Finance to discuss why Lululemon is a company on the rise and the opportunities for the company to expand going forward.
Nagel explains his stance on Lululemon's strength: "Overall, the consumer continues to hold up really well. I have been through a number of quarterly reports over the last few weeks... it seemed like there was a bit of consumer weakness in October, some of that was probably weather driven, basically it being too warm across the country, but I think what we're seeing consistently, and I very much expect Lululemon to talk about this on their conference call, is that the consumer, when there's a reason to spend, they are showing up."
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Video Transcript
JULIE HYMAN: Lululemon trading lower after reporting third quarter results. The company beating on the top and bottom lines, but fourth-quarter guidance seems to be weighing on the stock. Joining us now Brian Nagel, Oppenheimer managing director and senior analyst. It is weighing on the stock. But before the stock fell as much as 6% or so, now it's down more like 3% or 4%. Is this an overreaction? Is this appropriate? And does it indeed, Brian, have to do with that fourth-quarter outlook?
BRIAN NAGEL: Well, good afternoon. So look, I've been digging through the results as you have. There's a little bit of messiness here with these one-time items. So look, as I look at this report, OK, just to make it simple, I think you had a pretty nice beat in the third quarter, more on the bottom line than the top line, but really a beat. The gross margins were a lot higher than expected. So that was a positive.
They did lift modestly guidance for the balance for 20-- for the whole year. So in that, they gave specific guidance for Q4, which is slightly below the street. Now so to answer your question, I think that could be-- you know, that in and of itself could be somewhat of an impact on the stock. But again, they're going to have their conference call here in a few minutes. I think it's highly likely they say something to the effect of, look, we've got the holiday season ahead of us. It's an uncertain environment. We're being cautious, you know. And so they set the guidance accordingly. There's nothing in this report suggests to me that the underlying business of Lululemon is slowing.
Now the other thing, I think, we need to take in consideration when kind of trying to make sense of this initial move in the stock is this has had a stock that's had a big bounce lately. You know, I was just looking at the chart before I jumped on your show here. I mean, it's up like 30%, 35% in the last couple of months, basically before the market closed today touching all-time high. So you've had a big bounce in the stock. But again, I think-- I think the business is tracking quite well here.
JOSH LIPTON: And Brian, you know, it plays Lululemon in this kind of, let's call it, aspirational consumer space, right? You think of LVMH or Canada Goose. You know, that type of consumer, Brian, how are they holding up right now?
BRIAN NAGEL: Well, look, overall, it's a good question, Josh. I mean, it's-- I'm going to try to make it a short answer. I mean, overall, the consumer continues to hold up really well. We've been through a number of quarterly reports over the last several weeks or few weeks or whatever. It seemed like there was a bit of consumer weakness in October. Some of that was probably weather-driven with basically being too warm across the country.
But I think what we're seeing consistently, and I very much expect Lululemon to talk about this on their conference call, is that the consumer, when there's a reason to spend, they're showing up, OK? So in that reason, most recently is Black Friday or the beginning of the holiday selling season. So I think, you know, that to me is suggestive of a still underlying healthy consumer backdrop. And this aspirational consumer you call it, I think they're actually in decent shape here.
JULIE HYMAN: Well, and it seems like they don't necessarily need an event when it comes to Lululemon. I mean, they're comps have been pretty consistent here. And as always, when we talk about this company, I sort of try and figure out what the special sauce is. What is it in your view? Is it something to do with the management? Is it just the nature of the category they're in? What do you think?
BRIAN NAGEL: Well, there's a very easy answer to that question. It's the product, right? The product is-- they have a superior product. And you know, look, I'm an analyst. I've studied this company financially for a very long time now. But if you talk to anyone that wears Lululemon, they love the product. It wears well. It washes well. It looks good, blah, blah, blah. You know, so the product is their competitive advantage. I think they do a very good job in managing their brand. But really, this all begins with a superior product.
And I think this is important. I mean, we've seen this now for a while. You know, Lululemon is an athletic or athleisure brand. But it's clearly taking market share across clothing. I mean, more and more people are wearing Lululemon in non-athletic settings, for instance, work. You know, so that's a big market share opportunity for this brand.